In re Trados Incorporated Shareholder Litigation

Venture capitalists financed Trados Incorporated (Trados) in exchange for preferred stock and designating four of the seven members of Trados’s board of directors (collectively, defendants). Those four directors owned or worked for entities that together owned 51 percent of Trados’s preferred stock. The preferred stock had a high liquidation preference over the common stock, guaranteeing that the preferred stockholders would be paid first in the event of a merger or acquisition. When Trados was losing money and running low on cash, one director became concerned that Trados executives lacked sufficient incentive to stay with the company or pursue a potential acquisition because of the high liquidation preference. As a result, the board approved a management-incentive plan to pay executives graduated bonuses based on the price Trados obtained in an acquisition. Meanwhile, Trados’s financial condition improved markedly, lessening its immediate need for cash, but the board continued working toward a sale of the company. Ultimately the board unanimously approved a merger with SDL PLC for $60 million that closed six months later. The preferred stockholders received about $52 million. The remaining $8 million went to pay the executive bonuses, including about $2 million to Trados’s acting president and its chief executive officer, who were both directors designated by preferred stockholders. The common stockholders received nothing. Former common stockholder Marc Christen (plaintiff) sued alleging the board of directors breached fiduciary duties to the common stockholders by approving the transaction. Trados and the directors moved to dismiss the claims on the ground that the business-judgment rule protected the directors’ decision.